Working out how much rent you are able to pay should be straightforward, but it’s easy to overlook things and not count them in your budget for rent. To make sure you don’t get caught out by unexpected costs we take a look at the different methods and things you need to consider when working out how much you can afford to spend on rent.
The 30% Rule
A popular rule of thumb is to spend around 30% of your gross income on rent. So if you earn £2,800 per month before taxes, you should spend about £840 per month on rent. This is a guideline, but one-size- doesn’t fit all.
For example, if you live in an affordable area, you shouldn’t pass up a place that’s £600 per month simply because it’s only 21% of your income. On the flip side, sticking to spending 30% on rent isn’t always feasible in the bigger cities, where you are spending at least 50% of your income on rent - according to the open property group. 2019 Rental Affordability Index - The Most and Least Affordable Places To Rent.
The 50/30/20 Rule
You can also use the 50/30/20 budget as a guide to work out how much you can afford to spend on rent. This method allocates your take home pay (after taxes) to 50% for needs, 30% for wants and 20% for savings and additional debt payments.
So if you earn £2,800 per month after taxes, you’d split your pay up like below:
- £1,400 for needs - to cover all the expenses you can’t avoid like rent, utilities, food, travel, child care, insurance and minimum debt payments.
- £840 for wants - these are the extras that aren’t essential to living and working like shopping, entertainment and meals out
- £560 for savings & additional debt payments. This is the money you put away to prepare for the future
Don’t forget the cost of moving into the property too. Cash deposits are now capped at five times the weekly rent but this still averages over a thousand pounds in England and Wales. Will you need to budget for a removal service, or van hire if you’re doing it yourself? It’s also a good idea to have a savings account so you can cover moving out expenses when the tenancy ends. And if you’re moving to an unfurnished place, what do you need to set aside for furniture, curtains etc?
Check Your Tenancy Agreement
Check your tenancy agreement to see if you will have other costs. Some agreements state that you have to maintain the garden – so you might need tools, or a gardening service. Be 100% clear about which bills are your responsibility and which are paid by the landlord.
If you are living with friends or a partner, have a clear and frank discussion about who will be contributing what to the bills and set this out in writing. Nevertheless, if you have signed a sole tenancy agreement, you are liable for all the bills, whether or not your flatmate stumps up. If you have signed as joint tenants, everyone whose name is on the agreement is liable for the rent and bills, even if they move out during the term. But be aware that if the tenancy terms state ‘joint and several liability’, and one of your fellow tenants moves out, the landlord could chase you for any missing bills or rent.
Look For Savings
If what you can afford doesn’t align with the rental market in your area, look for ways to cut costs elsewhere. It’s natural to look to non essential spending to see if you could free up some budget, but you can often find savings amongst your necessary expenses, too;
- Utilities: Energy bills are a large part of your household budget, so make sure you’ve got the best available deal to avoid overpaying. We’ve teamed up with MoneySuperMarket to help you find the best deals.
- Groceries: Get in the habit of planning your meals and use vouchers to maximize your food budget.
- Rent: Living by yourself means shouldering the burden of rent and utilities on your own. Instead, find a roommate and split the cost of a two-bedroom. Need a more affordable option? Consider renting a room as part of a house share.
One thing that can really help with keeping track of your finances is our app, Canopy renter. Our RentPassportTM uses data from Experian and Open Banking to help you understand what your affordability level is and therefore what rental cost letting agents and landlords could approve you for.
We’re also going to be adding new tools in the app which help you understand where you are spending and work towards your financial goals. So keep a look out for these.